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How to Evaluate Gift Card Breakage

Ah, the sweet calm after the storm that is the holiday season. A wonderful time to reflect on holiday shopping fears conquered. Even in the happiest of times, these fears are warranted. Purchasing "the right" gifts can be intimidating — likely one of the reasons behind U.S. shoppers spending $42 billion on gift cards this year alone.

If your business is offering gift cards, digital or physical, you need to know how to accurately estimate, predict and evaluate your gift card breakage. Without these accurate estimates, the performance of your gift card program may be significantly different than you might have expected.

Get in front of your gift card program post holiday season and protect your business by predicting your gift card breakage and escheatment values.

What is Gift Card Breakage?

Gift card breakage is the amount of dollars that will ultimately be unused on purchased gift cards.

Though it seems irrational, your customers won't always remember to, or care to, spend the entire balance on a gift card. The outstanding amount, depending on specifics of your state legislature, may be considered profit for your business. However, you must clarify that the unspent value qualifies as your profit — or whether it's liable to escheatment — according to your local laws.

What is Gift Card Escheatment?

Gift card escheatment is the right of the government, depending on state law, to seize the breakage, or outstanding balance, on gift cards after a determined amount of time. The term and law, according to Merriam-Webster, are derived from English feudal law involving reclaimed property by the lords.

In other words, gift card breakage, depending on the state, gift card and purchase circumstance, is liable to be claimed by the government. Evaluating your gift card breakage, then, is a necessary step to evaluating overall financial risk. Plus, you don't want to be caught off-guard and have to return what you thought your business had earned.

How to Predict Breakage and Escheatment

Avoiding such liability and surprise is a must, but estimating breakage and escheatment is a complex actuarial exercise.

It starts with the ability to pull your gift card program transactional data. In addition, you'll need visibility into each situation when your outstanding gift card value was escheated.

Unfortunately, the transactional data within the system isn't always organized for a quick and accurate estimate. A clear overview of your gift card program requires considerable data manipulation to place data into an optimal format for actuarial analysis.

Predicting Breakage and Escheatment

To accurately predict breakage, your gift card program must use a predictive model. A predictive model is built on historical transactional data to predict how much value of your company's gift cards will eventually go unused and how much of that unused value may be escheated.

This exercise can be particularly challenging. To build a predictive model yourself, you'd need access to not only your historical data (to train the model) but also the mathematical modeling capabilities to create the training process and feed in the new results. Without that last piece, your model would never improve, and would focus only on static history rather than shifting parameters.

The same is true of escheatment. To build a model that predicts escheatment yourself, you'd likely have to forgo the ability to manipulate certain data parameters. For instance, you may have to assume current escheatment laws in the historical data will remain constant. Unfortunately, escheatment laws are continually changing on a state by state basis.

Modern machine learning is an effective solution to both challenges — but the model for learning must be robust and sound. That's a particularly high bar to clear on your own. The actuarial toolbox, combined with modern machine learning, is an effective solution for turning your transactional data into actionable insights for your gift card program.

Financial Reporting

Finally, as the last step to predicting breakage and escheatment, you'll need to be familiar with the accounting regulations that apply to gift card programs (ASC 606 in the US and IRFS 15 internationally). Complying with these standards requires some additional complex calculations to record and derecognize the gift card liability. And that's on top of your breakage and escheatment calculations — and again, something that can be done automatically with the right solution.

Predicting breakage and escheatment is a crucial part of evaluating your gift card program's performance — and setting it up for future success. If the process seems daunting, don't worry, there's a platform that can help.

 

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Len Llaguno
By Len Llaguno
Founder and managing partner of KYROS Insights. I'm an analytics nerd and recovering actuary. I use machine learning to help loyalty programs predict member behavior so they can identify their future best customers, and recognize and reward them today.

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